Technologies such as the internet of things, cloud computing, 5G networks and artificial intelligence are already changing the way we live, work and interact. These advances, known as the fourth industrial revolution (4IR), enable the automation of entire business processes that require repetitive intellectual tasks – customer service, data entry, bookkeeping and even some forms of research.
The fourth industrial revolution is percolating with innovation. The pace of international patenting for smart, connected devices accelerated during the last decade, growing an average of 20% from 2010 to 2018, compared with 12.8% from 2000 to 2009. Since 2010, patent growth in this domain was almost five times higher than for all other technologies.
These technologies are expected to add €2.2 trillion to the EU economy by 2030. Seeing their vast potential, the European Commission is pushing to create an environment for European firms to thrive and for development to match the pace in the United States and Asia.
About this report:
Deep tech innovation in smart connected technologies: A comparative analysis of SMEs in Europe and the United States aims to guide policymakers, industry and the broader public by providing a comprehensive analysis of small and medium-sized firms that have been developing fourth industrial revolution technology over the past decade. It focuses on technologically advanced businesses that have actively patented these technologies, as opposed to small businesses that are simply making use of these advances. Using data collected from a survey of 625 small and medium firms, the study provides decision-makers in the public and private sectors, as well as investors, with insights into the specific challenges facing technologically innovative firms in Europe.
US leads Europe
The United States dominates fourth industrial revolution patents. Twice as many US small and medium-sized businesses have an international portfolio of fourth industrial revolution patents, compared to the European Union – even though small businesses make up a smaller share of the American economy.
In the European Union, over 2 600 small and medium firms generated 3 181 international patent families (patents for highly valued inventions protected in multiple countries) for fourth industrial revolution technologies from 2010 to 2018.
- Small and medium firms accounted for 10% of all EU international patent families for these technologies. US small and medium firms, however, accounted for a greater share (16%) of all domestically generated international patent families for these technologies. Fourth industrial revolution patent portfolios of US firms also tend to be significantly bigger.
- Germany (570), France (400) and Italy (273) reported the largest number of small businesses working on these technologies. Most of those businesses are concentrated in a limited number of regions, primarily near capital cities. Outside the European Union, the United Kingdom (950) has the largest number of small businesses working on fourth industrial revolution technologies.
- Relative to their size, small countries like Finland, Sweden, Ireland and Denmark outperform other EU countries and even the United States when it comes to patenting fourth industrial revolution technologies.
Small but innovative
While 80% of EU firms active in fourth revolution technologies have 50 employees or less, only 41% are under ten years old. The relatively small share of startups reflects the long development cycles for these technologies, which present significant scientific or engineering challenges.
- Over 90% of European small businesses involved in this domain have already implemented fourth industrial revolution technologies in products or services or in their own firms. Applications span health care, transport, clean technology (alternative energies, water purification, efficient resource use, etc.) and data analytics.
- Of the small and medium firms developing these technologies, 44% are involved in manufacturing hardware, for example developing, building or selling devices. Patents filed by US firms relate more frequently to core hardware, software and connectivity technologies.
- More than one-third of the EU and US small businesses involved in these technologies have filed patent applications related to data mining and exploration.
Innovation investment
Firms developing fourth revolution technologies invest more than other small businesses. Some 80% of firms said they were actively investing in innovation, and about 70% of investment by these firms specifically targeted innovative technologies for the fourth industrial revolution. These firms also tend to raise more funding.
- A subgroup of fourth industrial revolution firms included in Crunchbase’s startups repository received, on average, significantly higher funding amounts than a comparable group of small businesses. This was especially true for firms that were growing rapidly and scaling their businesses.
- However, the share of these startups that say they have access to formal sources of funding is higher in the United States (68%) than in the European Union (59%). Also, more EU startups rely on public funding.
- Almost half of all surveyed firms (49%) say that holding patents helps them secure financing, and a large majority (80%) say that their investors wanted to see a strong intellectual property strategy.
Development barriers
While the market for fourth industrial revolution technologies is dynamic, firms in the European Union (73%) and the United States (77%) say that a lack of finance is preventing them from growing their business. A dearth of skilled workers is also a problem for EU firms (73%) and US firms (76%). Firms involved in these technologies, however, are less likely than other small businesses to cite these barriers as a severe issue.
More than half of US and EU firms complain about limited government support for their activities, although EU firms are more likely to consider a lack of government support as a major obstacle.
A number of government policies could spur the development of EU firms:
- The creation of a unitary patent would help firms protect their patents across Europe without having to follow administrative procedures in individual countries. The unitary patent is expected to significantly lower patenting costs in Europe.
- Direct policies – such as targeted grants that enable firms to award stock options, which helps attract talented employees – could foster innovation in technologies that are not yet competitive, cost-wise.
- Greater access to growth funding, such as venture capital or venture debt, could enable small firms to scale up and help develop more global leaders. Larger funding rounds, particularly for later-stage development, would help firms grow and encourage them to eventually list on European stock markets.